November 19, 2010
Thank you, Mr. Chairman, and let me thank the teams for their hard work in developing the rulemaking proposals before us today.
I would like to recognize Bob Wasserman for his hard work and patience in developing the Advanced Notice of Proposed Rulemaking. I would like to extend my thanks to Susan Nathan, Jeffrey Burns, and their team, and David Taylor and his team, for the work on their respective rulemaking proposals. Finally, I would like to thank Tom Leahy and his team for their efforts on the proposed real-time reporting rule.
Mr. Chairman, I am well aware of how passionate you are about real-time reporting and your desire to bring greater transparency to the swaps market. However, the real-time reporting rulemaking reminds me of what President Teddy Roosevelt once said. He said, “In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”
While I am quite certain we are not doing the latter, I am not convinced we are doing the best thing by mandating a 15-minute time limit to report block trades and large notional swap trades between dealers and end users, while providing little to no direction on the reporting of all remaining trades.
This proposal merely repeats the vague statutory direction provided in the Dodd-Frank Act and requires all non-swap execution facility (“SEF”) trades and end user trades to be reported “as soon as technologically practicable.” This definition does not provide the marketplace any further clarity.
I believe we owe the market some certainty as to what the Commission believes is “technologically practicable.” If the Commission doesn’t know, then we should admit as much and attempt to identify an outer time-reporting boundary to provide a clear safe harbor for the market to conduct its business.
As I noted at last week’s rulemaking, it is difficult to define the terms and conditions of post-trade reporting without the benefit of a proposal on the mode and manner in which swaps will be executed—e.g., the SEF definition.
I hope that we will be presented with a SEF definition proposal that will enable the market to transact on a range of electronic trading platforms, which will not only increase transparency, but will also lead to more standardized swap products.
A second concern I have with the proposed real-time reporting rule is that it fails to take into account the Dodd-Frank Act’s statutory mandate to consider whether reporting may materially reduce market liquidity. Unlike the futures market, the swaps market is comprised of a diverse set of products that trade infrequently and are larger in notional value compared to the futures markets. The swaps market also has far fewer participants. Congress clearly recognized that there are key differences between these two markets, and expects us to do our homework and understand the relationship between post-trade reporting and liquidity.
I am disturbed by a footnote in the rulemaking preamble that admits that there is a lack of public information regarding how market liquidity might be impacted by the proposed real-time reporting rule. Specifically, footnote 74 states, “The Commission expects that, as post-trade transparency is implemented in the context of the Dodd-Frank Act, new data will come to light that will inform the discussion and could cause subsequent revision of the proposed regulation.”
I find this “shoot first, ask questions later” approach to be problematic. I cannot support this rulemaking as drafted.
Data and Recordkeeping
Mr. Chairman, the data recordkeeping rulemaking proposal is a very important document. It does not hide the fact that we just don’t know how the collection, retention, and utilization of data will play out in the swaps markets.
This proposed rule makes over 75 requests for comment and I believe this approach is appropriate. I, too, have numerous questions, many of which relate to the Commission’s own technological capabilities. I am interested to know if the rulemaking team has given any thought to the necessary infrastructure investments the CFTC will need to make in order to fulfill the numerous regulatory responsibilities created by the proposed rule.
One important element of this proposed rule is the requirement to establish a unique identifier for every swap, swap transaction, and swap participant. I am eager to receive comment on this provision. While I believe the policy rationale underlying this requirement is sound, I do recognize that the cost burden of such an I.D. is high and its impact on data storage demands is significant. However, I understand that the domestic and international communities are eager to adopt such a concept and there is no better time to implement such a rule than at the beginning.
A major objective of this rule is to provide the Commission with the ability to more easily monitor and track swaps in the marketplace and identify systemic risk in the financial system, so that we may address any issues before it becomes a problem. I will be interested to know if the public agrees with this approach or has thoughts about an alternative solution.
In addition, Mr. Chairman, I believe that the rulemaking process is so sufficiently complex that I would not be opposed to extending the current 60-day deadline. An extension would enable the public to have the opportunity to respond to the 75 requests for comment.
Reorganizing the CFTC to Create the Office of Market Data Collection and Analysis
Mr. Chairman, the focus of today’s discussion on trade data reporting, storage, and analysis begs the question as to how the Commission is preparing to handle our greatly expanded mission. You are well aware of my strong desire to reorganize the CFTC’s Office of Information and Technology Services in order to establish an Office of Market Data Collection and Analysis. This entity will clarify the Commission’s technology needs and support the various Divisions’ market surveillance requirements.
Segregation and Bankruptcy (Cleared Swaps)
I have great concerns with this issue. I am pleased that the Commission is taking the prudent step of releasing an Advanced Notice of Proposed Rulemaking on the individual segregation of margin for cleared swaps. This is an extraordinarily complex issue and it will benefit from public input.
On November 3rd, I sent a letter to a number of end-user groups in the manufacturing, energy, and agricultural sectors asking for comment on the costs associated with individual account segregation and the possible creation of a bifurcated margining system. I received a range of comments—all of which will be posted on the CFTC website—from those who support individual account segregation, to those who strongly oppose it in favor of the current omnibus account system utilized in the futures market. It is clear that there is not a consensus among those who stand to be significantly impacted by this rulemaking proposal, and we must be cognizant that this divergence of opinions will not be resolved without substantial guidance from the public. I am very interested in developing a better understanding of alternative options or the opportunity to offer both margining systems to customers.
I have serious concerns about the impact different proposals may have on the risk management practices of futures commission merchants (“FCMs”) that handle swaps under this new regime. It is my understanding that not only has it been a longstanding industry practice for designated clearing organizations (“DCOs”) to not treat FCM customer funds held collectively in an omnibus account as the property of particular customers, but also that FCMs and DCOs have long relied on Commission guidance contained in Interpretive Statement No. 85-3 to do so. As a result, if an FCM customer is unable to make a margin call and the FCM defaults, regardless of which FCM customer’s inability to make a margin call resulted in the default, a DCO may recover owed margin from the FCM’s collective omnibus customer account.
If we propose to move away from our prior guidance and treat segregated customer funds for cleared swaps differently than how futures customer funds have been handled to date, we should fully consider our reasons for doing so. Mr. Chairman, I think it is important that the public is aware of the Commission’s prior guidance on this issue as they develop their comments. I ask that a copy of that interpretation be included with the rulemaking proposal that will be published in the Federal Register.
Mr. Chairman, in closing, I recognize that we still have a good deal of work ahead of us as we all try to do the best we can to get these proposals right. In the interest of providing the most meaningful debate possible, let me renew my request to move the entity definitions to the next rulemaking meeting. If we are not able to consider the SEF definition at the next meeting, then I would not be opposed to extending the deadline of the real-time reporting comment period to provide adequate time to consider these rulemakings side-by-side.
I also renew my request to conduct a staff-led roundtable on capital and margin issues.
Finally, again, I know that all the teams have spent long hours working on these proposals, and I am grateful for their efforts. I look forward to participating in the discussion today.
Last Updated: January 18, 2011